Viewpoint
VIEWS, PERSPECTIVES AND READERS’ LETTERS
Think of money as a tool to build your business W
hy did you start your business? Really think about it. Why? What are your hopes and dreams? Why are you doing this? You are investing a large part of your life and you will ask others to join, so you really need to know your goals. And those goals, in my humble opinion, need to COLE go deeper than just DUDLEY making money. When looking for an investor partner, and I do mean partner, seek people to whom you will be married for many years. You’re not just looking for money. Let that sink in, it’s not all about the money! Money is a tool. It does not grow a business. Money will come if you build a good business, and the partner you are seeking will help you build that business. Your first task is to identify someone who buys into your vision, adds value beyond the money, and with whom you have mutual respect. Start by understanding which investor types match your goals for growth, exit time frame, and social good. For early-stage companies, the most likely investors include friends and family who may invest just because they like you. Angel investors are wealthy individuals or groups of wealthy individuals. They usually make investment decisions individually, so their goals and decision processes vary. Family offices invest for wealthy families and, again, their goals vary, but a long-term hold strategy is a possibility. Finally, venture capitalists invest for high growth and an exit in five to seven years at multiples of their investment. Corporate venture capitalists may invest for financial or strategic reasons, or a combination. With professional investors, you will give up some control through board and share votes and/or restrictive covenants. Be sure to develop a good relationship with your investor partner and align goals before you accept money. Then, review the documents with an attorney
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experienced with early-stage financings. Money is invested as debt or equity. Which is better for your long-term goals? Debt will allow you to maintain 100% ownership but uses cash flow and comes with restrictive covenants. Equity holders will own part of your company but are more fully in the boat with you. Either way, you have a new partner, and you will need to communicate often with them. If you’re not familiar with capital structures, make sure you get expert advice. The capital stack is the order in which holders of debt and equity are repaid. Debt always gets paid first. Equity holders are paid next, with the exact order driven by the share classes and differing rights of each. Money is just a tool. Spend it, and it’s gone. What is left behind? What did you build? And, did you build a company that will get to the next step? That next step may be attracting a larger round of funding, reaching cash flow break-even, or
selling the company for a nice valuation. The question is, did you reach the critical milestones you forecast when you raised the money? If not, the path gets steeper as attracting additional capital will be harder. How much is your company worth? Valuations change with time, geography, investor and stage of the company. Valuing an early-stage company is not exact science, but it can be logic-driven as it is often guided by the market for similar companies. Be aware of the valuations being paid and know the keys to increasing a company’s value such as showing great potential and reducing the management, technical, operational and market risks. To efficiently grow a business, identify and understand the business’s levers (i.e., repeatable processes) that yield repeatable results. For example, how many new accounts will a salesperson produce per month and how much new revenue does
Correction A story in the Oct. 4 edition of the Charleston Regional Business Journal incorrectly characterized the purpose of a cell phone tower near The Charles. The tower ensured AT&T and T-Mobile cell reception for nearby residents and first responders during construction of The Jasper and has been replaced by a new antenna located atop The Jasper.
that provide? What is the lifetime value of a new account? You can now build a revenue ramp forecast based on the number of salespeople. Also, with the average lifetime revenue of a customer, the average cost to acquire a customer, and your margins, you know the payback and profit for each new customer and therefore each sales rep. You won’t start with this knowledge, although there are likely industry metrics. You will need to initiate gathering the data from the very beginning, then define the repeatable processes and use the data to measure effectiveness and direct investment of resources. So…. What will you build? How will you do it? Will it get you to your goal? Will it attract the people and customers you need? If so, the money will follow. CRBJ
Cole Dudley is director of SC Industry Solutions for the S.C. Research Authority. Find more information at www.scra.org.
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